Are management myths hurting your business?

Are executives inclined to overstate the benefits from the adoption of systems such as ISO9000? And could they actually be detrimental to businesses without them even realising it?

Freek Vermeulen

10:14AM GMT 10 Nov 2010

Have you ever heard that the Great Wall of China is visible from outer space? Well, it is a myth. But also a very persistent one, despite there being clear evidence that it is not. Similarly, there are quite a few myths in business that are very persistent, despite clear evidence exposing them. Let me tell you about three types of business myths, and give you some examples.

Self-perpetuating myths

First, there are self-perpetuating myths, and they exist in almost all industries. Take the film industry. Film distributors have preconceived ideas about which films will be really successful. For example, it is generally expected that films with a larger number of stars in them, actors with ample prior successes and an experienced production team will do better at the box office.

Sure enough, usually those films have higher attendance numbers. However, professors Olav Sorenson from Yale and David Waguespack from the University of Maryland discovered that, because of their beliefs, film distributors assign a much bigger proportion of their marketing budget to those films. Once they acknowledged this factor in their statistical models, it became evident that those films, by themselves, did not do any better at all. The distributors' beliefs were a complete myth, which they subsequently made come true through their own actions. And there are other examples for different industries.

Management fads

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The second type of business myth is the 'management fad'. These fads concern management practices that at some point emerge and become popular, such as the old Total Quality Management, ISO9000 system or SixSigma. They usually behave like popular fashions, just like the ones in design or clothing: they come and go, and sometimes reappear many years later under a slightly different guise.

Although often quite harmless – yet seldom really useful – some of them can actually be quite detrimental, without the adopting firms realising it. Take ISO9000. In a nutshell, this helps firms to identify best practices within their organisation, document them, and make sure that everyone in the firm follows that one standardised best practice. Thus it leads to efficiency and productivity gains.

However, unexpectedly and unfortunately, as professors Mary Benner from the University of Minnesota and Mike Tushman from Harvard Business School discovered, the firms that adopted ISO9000 several years down the line saw a decrease in their innovativeness, as measured by new technological inventions. The system of homogenised best practices stimulated efficiency but it also blocked deviations from the standard, consequently limiting the discovery of innovations.

'Reverse causality'

The third type of business myth pertains to the issue of so-called reverse causality. Over the years, popular business books such as In Search of Excellence, Built to Last, and Profit from the Core made recommendations to managers by comparing highly successful companies and finding out what they have in common. Although at first sight this may seem like a logical approach, there is one big catch to it: the risk of reversing cause and effect.

Several of these books, for example, recommend that firms should develop a strong, coherent organisational culture. That is because most of these highly successful firms had one at the time of writing the book. However, research tells us that firms often develop a strong coherent culture as a result of having been successful for several years. Hence, their strong culture is not the cause of their success; it is the consequence of it. Trying to develop a strong coherent culture might not help you to become successful at all. It could even be harmful and counterproductive, because a coherent culture could also lead to 'groupthink' and a lack of innovation, which could be dangerous, especially in a fast-changing business environment.

There are many myths in business; some specific to particular industries and some more general. Some myths merge but also disappear after a while. Others are surprisingly persistent. They almost act like business viruses; they have a detrimental effect on their "host" (the adopting organisation) but they also spread rapidly, because they are easy to replicate.

You could describe this as "the sneeze theory of management myths"; companies affect each other because they do business with one another. For example, ISO9000 is easy to imitate because it concerns a standardised set of rules and procedures. Moreover, firms that have adopted it often start to expect that their suppliers follow the same system, making the practice spread.

Furthermore, we know from research – by, among others, Professor Mark Zbaracki at the University of Western Ontario – that executives are inclined to overstate the benefits from the adoption of systems such as ISO9000 to other people within their firm and to other firms in their industry, thus stimulating the further diffusion of "the virus" and keeping the business myth alive.

Freek Vermeulen is an Associate Professor of Strategic & International Management at the London Business School and the author of "Business Exposed: The naked truth about what really goes on in the world of business" (FT Prentice Hall)

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